This newsletter is the first of two parts. This entry contains notes on BMO Capital markets’ Equity Research on Education and Training report.
The Education and Training Equity Research report is 240 pages long, published in September 2006. The lead analyst is Jeffrey Silver. The report looks at Education from an investor’s standpoint, so it offers a different point of view to those we generally hear about. Most of the report focuses on the K12 and the Postsecondary markets.
The second entry will contain impressions from some of the presentations and panels at the BMO Capital Markets’ Back to School 2006 Education Conference held in New York City on September 15, 2006. There is also an audio webcast of the conference at https://www.bmocm.com/conferences/backtoschool2006/default.aspx
Here are some interesting points gleaned from the report.
There were $200 billion of private investments in the education market in 2000. There was $181 million in 2003. This bounced back to $364 million in 2005.
This points to why it’s seemed so hard for the last 5 years to get new ideas financed. But, what were people thinking in 2000? That’s a lot of money.
To a certain extent, the growth of the Childcare (pre-school) market, is based on demographics. There is some predicted growth in the number of under-5 year olds over the next 5 years. But, growth is also fueled by the willingness of corporations to offer child care as a benefit.
In 1975, only 39% of women with children under age 6 were in the workforce. In 2005, this had grown to be 62.6%.
70% of children under 6 with college educated mothers attended childcare, while only 38% of children whose mothers had not attended college attended childcare.
There have been quite a few predictions about shortages in the labor market over the next few years. If you think the pressure to keep costs down will trump the need to find qualified workers, there will be slow or no growth in childcare providers. If you think that the need for qualified workers will drive companies to increase benefits, this could be a very interesting market.
The largest component of funding in the K12 market comes from states. The 2001 to 2003 year period the average increase in state funding was just 2.8%. The 2004/5 school year saw an increase of 6.9%, 2005/6 is expected to be around a 6% increase, and 2006/7 is predicted to be around 7.9% increase. Historical averages are around 7.4%.
The fastest growth in expenditures has been on “support” items (including testing and assessment) at 8.4% increases, rather than instructional or non-instructional spending. BMO and Eduventures expect the assessment market to by $1.7 billion in 2006 and continue growing at 7% annually for the next few years. This, while the school population is growing at approximately 1%.
If school budgets increase by less than 7%, the money is going to be coming out of other budgetary buckets.
Digital content represents about 20% of supplemental content market, but is expected to grow to beyond 25%. Smaller publishers are showing the most innovation, but these small companies are likely to be gobbled up by the larger players.
Sales of tutoring services to schools has been growing by 17% a year. This is fueled by the No Child Left Behind mandate that failing schools have to provide tutoring for their students.
Virtual schools seem to be in a great position, because the receive the same amount of per-student funding as charter schools, but do not require a physical structure. There are currently about 150 virtual schools, serving about 65,000 students. States are the biggest providers of virtual schools, although the courses are often designed or created by for profit companies.
The K12 Educational Print Publishing market is about 17% of the US Print Publishing market and is expected to grow at 5% a year for the next 5 years. The top four publishers (Houghton Mifflin, McGraw-Hill, Pearson, and Reed Elsevior) control about 85% of the basal print market.
English Language Learners were about 5% of students in 1991, about 9% of students in 2003, and might even reach up to 30% by 2030.
Growth in postsecondary education is driven by the following factors:
- Demand for higher level skills
- The earnings premium of an education
- Non-traditional students re-entering education
- Flexibility of online programs
For-profit postsecondary revenues have increased four-fold since 1996, and are now 5.5% of total spent on postsecondary education. For-profits have been growing at 11.5% a year, as opposed to non-for-profits, growing at 2%. It is expected that the for-profit market will continue to increase share, growing at 9.7% per year.
Over half of the students attending for-profit schools are expecting to earn a 4-year degree. The for-profit schools tend to emphasize career skills more than the not-for-profit schools. This also corresponds to student perceptions, since preparing for a career was the number one goal; in fact, 70% of parents say it a very important goal of college (67% said “preparing students to be responsive citizens” was very important, and 66% said “preparing future leaders of society” was very important).
Because not-for-profit colleges are increasing tuition rates at over 6% a year, the for-profits have easily been able to command 4% increases.